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Wednesday, December 19, 2007

The new law means the corporate average fuel efficiency standard to be 35mpg by 2020. I personally think that sets our sights too low to be honest, but it is a start. This will help the environment and it will send a signal to automakers that huge Hummers and consumer pickup trucks the size of semi trailers are not the way our economy needs to go. But it's not just about the environment and congestion - higher fuel efficiency reduces shoeleather costs (the costs of having to continually stop to pump gas to fill your tank). Incidentally, carbon taxes may not necessary reduce such shoeleather costs since taxes don't necessarily translate to better fuel efficiency.

Further, these new standards are a direct incentive to not only look at alternative fuels, but to look at alternative technologies and cutting edge technologies WITHIN the existing fuel-using automotive industry. It may be carbon-based energy makes the most sense now and into the future - at least now there is a greater spark toward conservation.

Of course, as the article mentions, at least in the short-run, we can expect these standards (as they are implemented) will cause fuel prices to rise as the cost to producers rises. This is no different (though perhaps to a lesser degree thankfully) than what would happen with carbon taxes or cap-and-trade, but 1. it is politically feasible and reasonable, and 2. the consumer pays none of the cost psychologically speaking (which counts for something - even though some of this cost will surely pass down to them, they won't necessarily link the higher cost to the fuel standard change).

Finally, I like it because for the first time in decades this is something real and tangible that is being done - not just talk and hype. Time will tell if this legislation is worthwhile or not (I obviously think it is), but thank goodness somebody had the balls to pull the trigger on something real.

Friday, December 14, 2007

Frank Ackerman, Director of Research and Policy at the Global Development and the Environmental Institute at Tufts, has this new paper out published via the Post-Autistic Economic Review. He argues for a solution beyond market mechanism solutions, pigovian taxes etc. to climate change (Pigovian taxes, Cap and Trade etc). He also provides a very easy-to-follow critique of neoclassical economic models' application to climate change solutions:

Neoclassical economic models are too static to be able to deal with Climate Change -static pareto optimality is not sufficient as a solution.

...But for all that, he, like may in the Post-Autistic circle, offers up no real alternatives. His most concrete solution is this:

"There is no formula for optimal public decision-making; instead, a deliberative process of discussion is required....In short, an entirely different conversation about public goods and priorities is needed, one that respects the importance of the underlying values - and one that includes, but is not always dominated by, the best available information about costs. It is a conversation which, sadly enough, Americans have been able to have in recent years only about national security, protection against terrorism, and military spending. The empirical content of that conversation has remained controversial; recall the search for Iraq’s alleged weapons of mass destruction. Unfortunately, while confidence in the public sector and its unquestioned responsibility for our collective welfare is alive and well in decisions about the military, it has wasted away in civilian life. "I'm all about "conversation," but I'm not hippie enough to think that the world is going to join hands, share a few daisies, sing kumbaya, and then have a deep long-lasting discussion about climate change. What we need is a. to really determine if our environmental situation is really that serious and in what ways (there is still a healthy debate, despite what Al Gore thinks), and b. (if it is that serious) start trying outreal solutions - try modifications to CAFE, try cap and trade (US style), try pigovian taxes, or a combination of these or others. Who cares about the theory. If it/they don't work either financially or otherwise, scrap it and move on to the next attempt/policy. If we are really standing at the edge of a cliff, why are we still "talking" about this. We don't need any more sound bites and things that sound philosophical but are really just cop-outs.

Wednesday, December 12, 2007

I don't think the 'new' Fed under Bernanke has made any huge mistakes, and I think Bernanke is continuing, as Greenspan has said in interviews, in much the same way his predecessor might under the circumstances. But this recent rate cut move I find interesting. The Fed cut interest rates by 1/4% (25 basis points), which they had to know was lower than what the market was hoping for. Stocks plummeted. But then the Fed made the unusual call of very strongly saying that more rate cuts are to follow - ie - don't worry stock market, we are here to help. Consequently, stocks soared today (or this morning at least). Either the Fed should have been quicker with their statement, or they should have said nothing at all. Instead, they only added to the stock market's volatility.

An interesting point: why is it that stock investors didn't already THINK that rates were going to be cut more in the future. If they DID think that prior to the Fed's announcement, we would have expected that expectation to already be accounted for in stock prices - hence we would not have expected the surge today. But the surge happened, and ceteris paribus, that must imply that the meat of the announcement was a welcome surprise. All this makes me think that stock investors are really just as much concerned about inflation - or more to the point, they think the Fed is really concerned about it....

Saturday, December 8, 2007

Mankiw's paper on the taxation of height espouses the idea that, if we reject such a notion, then why are we bothering with models of efficient forms of taxation and the like.... The NY Times recently points out what they believe the paper's logical flaw.

Credit Mankiw for posting the critique. The mistake the NYT thinks Mankiw makes is, to quote: "that if you can draw a silly inference from an approach, then that discredits a model.”

Mankiw responds by saying, 'well what's the point of having theories then.'He says further, "It seems to me that if you are going to reject a logical inference from a model, you have to explain why. That is not so easy for a height tax, which is precisely the point of the paper."

I disagree wholly with Mankiw, as do many others. It seems patently obvious why people reject height taxation over other forms of taxation. And the fact that Mankiw doesn't see this shows just how disjointed his belief in the power of economics is with reality.

On this, I make two points: First, economic theory does illuminate, but it doesn't illuminate COMPLETELY. If all policy makers listened ONLY to their economic advisors, this world would be in the shitter faster than you could blink. We would be in this no-holds-bars free-market soup of robots (sorry, economicus's). People would suffer, but dang-nabit we'd have a more optimal size of the pie (GDP). I've mentioned before that economists that push economics as a more powerful voice than other fields are not doing anyone a favor. That is why I believe in a greater separation of economics and politics. Economics should be used as a piece to the puzzle, but when it is used for more than that, we are all in trouble.

Second, more to the point of height taxation, it is obviously ridiculous because taxation is in and of itself NOT just an economic idea. Taxation certainly affects the economics of the taxed area, but taxation also directly effects the psychology and sociology of the masses. When we tax on income, people think that (while they may not like the level of taxation) that is valid because that is a fairly direct way of redistributing resources from the haves, and giving it to the havenots. It's not efficient, but it is an easier psychological pill to swallow. THAT is the trade off. Mankiw loves to talk about trade offs within economics, yet he simultaneously ignores trade offs between the disciplines. Taxing height hearkens, psychologically, to some sort of fascist mentality. People don't think, "well, height is correlated to income, so I guess it's ok." They think: "I am being discriminated against based on an innate trait. My government is fascist. "

So the NY Times I think is partially right, but they were sloppy in their analysis - they too failed to focus on the bigger picture of what exactly taxing height means. One can summarily reject Mankiw's ridiculous height tax, AND still support economic theory of taxation by simply understanding that economic theory is meant to illuminate a part of the picture. But the best policy is one that has a million flashlights shining on it. Otherwise.....

Monday, December 3, 2007

Becker/Posner has a great new blog post about the problems with cap and trade carbon offset systems. The reason I point this out over the zillion other econ people jumping on the carbon-gabbing bandwagon (myself included) is because the entire post talks about 3 negatives of carbon offsetting via voluntary cap-and-trade - and the negatives are ENTIRELY psychological.

From their blog (in red):

1 The first is that it creates the impression that modest reductions in the rate of annual increases in carbon emissions make a meaningful contribution to the fight against global warming.2. Second, the movement encourages the belief that anyone who reduces his carbon "footprint" (that is, the emissions of carbon dioxide that he causes) to zero has done his bit to combat global warming. 3. Third, and most serious, the carbon-offset movement, combined with well-publicized projects by Google and other companies to reduce carbon emissions, creates the false impression that global warming can be tamed by voluntary efforts, just as cleaning up after dogs has been achieved by voluntary efforts, without need for legal compulsion. ...all psychological arguments against cap and trade. I wonder, if we think about carbon taxes as an alternative, do these same negatives dissapear? I would argue the first two don't. The truth is, the higher the tax, the less feasible it will be. Even if one assumes a tax passes government muster, there is only so much offset a tax increase can do. Trying to do more (ie beyond what is feasible) would incite riots and protests, of this I am sure. Second, inherant in the first two arguments is the idea that people THINK they know or THINK they can guesstimate accurately how much of a carbon footprint they leave. This is offbase to say the least, as Posner points out. If one person can't get it right, what makes us think our government can?

Nevertheless, the third argument is clearly a net postive for the tax-lover crowd. A tax is not voluntary, it's mandatory. It has some teeth. The problem is, as I mentioned, if the government were to impose too high of a tax, that could create its own problems in the form of civil unrest, or if the "efficient" tax is miscalculated (and it would be), it could also do more harm than good.....

Garth Brazelton

About Me

I work for the Indiana Economic Development Corporation as the Director of Operations and Business Systems, and I teach macroeconomics at Indiana University (Indianapolis). Previously, I was an Economist at the US DOT in Cambridge, MA. This blog does not represent the opinions of any of these organizations.